In­no­va­tion key fac­tor in eco­nomic war of code­pen­dency

China Daily (Latin America Weekly) - - 12 Comment Editorial • Opinion -

Code­pen­dency never ends well in per­sonal re­la­tion­ships. Judg­ing by the everesca­lat­ing trade con­flict be­tween the United States and China, the same is true of eco­nomic re­la­tion­ships.

Although I pub­lished a book in 2014 on the code­pen­dent eco­nomic re­la­tion­ship be­tween the US and China, I would be the first to con­cede that it is a stretch to gen­er­al­ize in­sights from hu­man psy­chol­ogy to as­sess the be­hav­ior of na­tional economies. But the sim­i­lar­i­ties are strik­ing, and the prog­no­sis all the more com­pelling, as the world’s two largest economies move to­ward a dan­ger­ous quag­mire.

In its most ba­sic terms, code­pen­dency oc­curs at one of the ex­tremes of re­la­tion­ship dy­nam­ics — when two part­ners draw more from each other than from their own in­ner strength. This is not a sta­ble con­di­tion. Code­pen­dency deep­ens as part­ner feed­back tends to grow in im­por­tance and self-con­fi­dence steadily di­min­ishes as a re­sult. The re­la­tion­ship be­comes highly re­ac­tive and fraught, with mount­ing ten­sions. In­vari­ably, one part­ner hits a limit and seeks a new source of sus­te­nance. This leaves the other feel­ing scorned, steeped in de­nial and blame, and ul­ti­mately with a vin­dic­tive urge to lash out in re­sponse.

The case for US-China eco­nomic code­pen­dency has been com­pelling for many years. On the brink of col­lapse in the late 1970s, due to the cu­mu­la­tive con­vul­sions of eco­nomic poli­cies and the “cul­tural rev­o­lu­tion (1966-76)”, China turned to the US for ex­ter­nal sup­port for late leader Deng Xiaop­ing’s strat­egy of “re­form and open­ing-up”. The US, in the grip of stagfla­tion in the late 1970s, was ea­ger to seek new growth so­lu­tions; low-cost Chi­nese im­ports were the an­ti­dote for in­come-con­strained Amer­i­can con­sumers.

The US also be­gan to bor­row freely from China’s vast reser­voir of sur­plus sav­ings — a con­ve­nient so­lu­tion for the world’s largest deficit saver. Born out of in­no­cence, this two-way de­pen­dency blos­somed into a seem­ingly bliss­ful mar­riage of con­ve­nience.

Alas, it was not a lov­ing re­la­tion­ship. Deep-seated bi­ases and re­sent­ments — China’s “cen­tury of hu­mil­i­a­tion” fol­low­ing the Opium Wars of the 19th cen­tury and the US’ in­abil­ity to get out of its own skin when as­sess­ing the ide­o­log­i­cal threat posed by a so­cial­ist state such as China — sus­tained a longsim­mer­ing dis­trust that set the stage for the cur­rent con­flict. As the hu­man pathol­ogy of code­pen­dency would pre­dict, a part­ing of the ways even­tu­ally oc­curred.

China was the first to em­brace change — com­mit­ting to an eco­nomic re­bal­anc­ing by shift­ing its growth model from ex­ter­nal to in­ter­nal de­mand, from ex­ports and in­vest­ment to pri­vate con­sump­tion. China’s progress has been mixed, but the endgame is no longer in doubt, un­der­scored by a shift from sur­plus sav­ings to sav­ings ab­sorp­tion. After peak­ing at 52.3 per­cent in 2008, its gross do­mes­tic sav­ings rate has fallen about 7 per­cent­age points and should con­tinue to de­cline in the years ahead as China strength­ens its long-por­ous so­cial safety net, en­cour­ag­ing Chi­nese fam­i­lies to re­duce fear-driven pre­cau­tion­ary sav­ings.

At the same time, an ex­plo­sion of e-com­merce in an in­creas­ingly dig­i­tized (that is, cash­less) econ­omy is pro­vid­ing a pow­er­ful plat­form for China’s emerg­ing mid­dle-in­come con­sumers. And a trans­for­ma­tion from im­ported to in­dige­nous in­no­va­tion is cen­tral to China’s longterm strat­egy, both to avoid the “mid­dle-in­come trap” and to achieve ma­jor power sta­tus by 2050, as per Pres­i­dent Xi Jin­ping’s “new era” cen­te­nary as­pi­ra­tions.

Con­sis­tent with the hu­man pathol­ogy of code­pen­dency, China’s shifts have be­come a source of grow­ing dis­com­fort for the US, which can hardly be thrilled with China’s sav­ings pivot. With the US’ sav­ings short­fall now wors­en­ing in the af­ter­math of last year’s poorly timed tax cuts, the coun­try will only be­come more re­liant on sur­plus savers such as China to fill the void. Yet China’s move to ab­sorb sav­ings nar­rows that op­tion.

More­over, while China’s nascent con­sumer-led growth dy­namic is im­pres­sive by most stan­dards, lim­ited mar­ket ac­cess has con­strained US com­pa­nies from cap­tur­ing what they judge to be a fair mar­ket share of the po­ten­tial bo­nanza. And, of course, there is huge con­tro­versy over the in­no­va­tion shift, which may well lie at the heart of the cur­rent tar­iff war.

What­ever the source, the con­flict phase of code­pen­dency is now at hand. China is chang­ing, or at least at­tempt­ing to do so, while the US is not. The US re­mains stuck in the time-worn mind­set of a deficit saver with mas­sive mul­ti­lat­eral trade deficits and the need to draw freely on global sur­plus sav­ings to sup­port eco­nomic growth. From the per­spec­tive of code­pen­dency, the US now feels scorned by its once ac­com­mo­dat­ing part­ner and, pre­dictably, is lash­ing out in re­sponse.

Which brings us to the burn­ing ques­tion: Will the US-China trade con­flict end with a peace­ful res­o­lu­tion or an ac­ri­mo­nious di­vorce?

The lessons from hu­man be­hav­ior may hold the an­swer. Rather than re­act out of blame, scorn and dis­trust, both coun­tries need to fo­cus on re­build­ing their own eco­nomic strength from within. That will re­quire com­pro­mises on both sides — not just on the trade front, but also on the core eco­nomic strate­gies that both coun­tries em­brace.

The in­no­va­tion dilemma is the most con­tentious is­sue by far. The con­flict phase of code­pen­dency frames it as a zero-sum bat­tle: US al­le­ga­tions of Chi­nese in­tel­lec­tual prop­erty theft are por­trayed by the Don­ald Trump ad­min­is­tra­tion as noth­ing less than an ex­is­ten­tial threat to US’ eco­nomic fu­ture. Yet, seen as a clas­sic symp­tom of code­pen­dency, those fears are overblown.

In­no­va­tion is in­deed the lifeblood of any coun­try’s sus­tained pros­per­ity. But it need not be de­picted as a zero-sum bat­tle. China needs to shift from im­ported to in­dige­nous in­no­va­tion to avoid the mid­dle-in­come trap — a key stum­bling block for most de­vel­op­ing economies. The US needs to re­fo­cus on in­no­va­tion to over­come yet an­other wor­ri­some pro­duc­tiv­ity slow­down that could lead to a cor­ro­sive stag­na­tion.

That may well be the bot­tom line on the trade con­flicts of code­pen­dency. The US and China both need in­no­va­tion-led economies for their own pur­poses — in code­pen­dency terms, for their own per­sonal growth. Trans­form­ing a zero-sum con­flict of code­pen­dency into a pos­i­tive-sum re­la­tion­ship of mu­tu­ally ben­e­fi­cial in­ter­de­pen­dence is the only way to end this eco­nomic war be­fore it turns into some­thing far worse.

The au­thor, a fac­ulty mem­ber at Yale Univer­sity and former chair­man of Mor­gan Stan­ley Asia, is the au­thor of Un­bal­anced: The Code­pen­dency of Amer­ica and China. Project Syn­di­cate

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